Whether you are looking for a cash flow boost or cash for business growth, a merchant cash advance is a straightforward way to get money for your business.
A merchant cash advance, which is also called a PDQ loan or business cash advance, allows you to quickly access business funding. It is paid back to lenders through a percentage of your customer’s credit and debit card payments.
What Is a Merchant Cash Advance?
A merchant cash advance is a short-term business finance loan. They are a quick way to inject cash into your business.
Unlike a traditional bank loan, a merchant cash advance does not require large fixed monthly payments. It is instead automatically paid back through a percentage of your business’s future card sales.
This way, you can pay off your loan according to your business’ performance. The more credit card sales your business makes, the sooner your loan will be paid off. These flexible repayments make the merchant cash advance a very accessible option for businesses.
It is an unsecured loan, meaning you do not have to offer any business assets as security. For this reason, they are easier to obtain than other types of business funding. Most UK businesses that have a merchant account and accept card payments will qualify for the funding.
Technically, a merchant cash advance isn’t a loan, even though it is often called a PDQ loan. It is an advance on the amount of money your business is predicted to make. So instead of lending money, you are selling a percentage of your future card transactions to a lender.
How to Apply for a Merchant Cash Advance
It’s quick and easy to apply for a merchant cash advance. All you need to do is find a provider that works for you depending on their criteria.
Most providers have a simple online form to fill in to apply. You will receive a decision within just a few business days, depending on the provider.
Do I qualify for a business cash advance?
To qualify for a business cash advance, you need to be a UK-based business registered as either a sole trader, a partnership, or a limited company. You will also need to hit a minimum monthly card turnover, depending on which provider you choose to apply with.
With a merchant cash advance, UK businesses can generally borrow from £1,000 to £250,000. The specific amount of money your business can borrow will depend on your monthly card transactions.
To be eligible, your business needs to process card payments. A decision will usually be made within a few business days of applying and there is a very high acceptance rate.
How Does a Merchant Cash Advance Work?
A merchant cash advance isn’t paid off through fixed monthly repayments. Instead, a percentage of each card transaction your business processes is automatically forwarded to the lenders.
A merchant cash advance provider will charge you a factor rate for this service. This is expressed as a decimal figure and usually ranges between 1.1 and 1.5. For example, if you are lending £10,000 and the factor rate you are being charged is 1.2, you will have to pay back £12,000.
To repay the advance, lenders will get a percentage of all your debit and credit card payments. This percentage will be agreed upon beforehand and it is usually around 10%. So if your business’ monthly card turnover is £20,000, you will pay back £2,000 that month.
The repayments are processed automatically, which makes it easier for you. You don’t have to handle money or make calculations as the agreed-upon percentage of your card sales is sent straight to the finance providers.
This method allows you to pay back the loan at your business’ own pace. If your business makes more sales one month, you pay back more, allowing you to repay the full amount quicker. If your business is making less, you don’t need to worry about paying back a fixed amount like with traditional bank loans.
What Can a Merchant Cash Advance Be Used for?
Lenders will not require you to use the advance for any specific purposes so you can use the cash for anything your business needs. Typically, the cash injection is used to grow the business or improve cash flow. There are several ways in which businesses use this advance.
Buying stock. There are many challenges in running a business but one vital aspect is having enough stock. If you quickly need cash to keep your stock steady, this advance could provide you with the right funds to do so.
Improving cash flow. If your business operates in a field where seasonality is an important factor, you might want additional funding in quieter periods. This funding also allows you to pay back the money you borrowed according to how much your business makes in card payments in a certain month.
Investing in equipment. This loan will give you the funds to pump new life into your business by buying new equipment or refurbishing old equipment. It’s important to keep up with the latest technology and these funds will allow you to do so.
Training staff. Your staff is one of the most vital parts of your company. It’s important to keep everyone’s skills at the highest possible level. You can now get the budget to either train new staff or sharpen the skills of your existing staff.
Marketing and advertising. Getting your business’ name out there is key. However, creating good, targeted advertising isn’t cheap. You can now get the funds to boost your business to the next level.
Can I Get a Merchant Cash Advance If I Have Bad Credit?
Yes. Bad credit or a history of bad credit does not affect your chances of getting funds. This is solely based on revenue, meaning only your customer card payments are checked to see if you will be able to pay back the advance. Your business’ trading history is key.
Merchant Cash Advance Pros and Cons
Pros:
- Proportional repayments: If you have a month where your business has fewer card sales, you pay back less money that month. This lowers the financial pressure on your business.
- Quick and straightforward process: In just a matter of days after applying, you will have funds in your account. You don’t need to show any business plans or assets.
- Automatic repayments: A percentage of all your card sales will automatically be taken off as repayments. You will never even see this money so you don’t have to make any calculations or handle complicated paperwork.
Cons:
- Enough card sales required: If most of your business’ income is through cash payments, you might find it hard to get your application approved. Lenders will need to see your monthly card takings to determine whether you are eligible or not.
- Higher repayments: Since the repayment period is usually shorter than for bank loans, the monthly repayments will be higher.
- Not suitable for start-ups: Since your trading history is so important to assure lenders that your business has the cash flow to make sufficient repayments, this funding might be hard to obtain for start-ups.
Businesses Best Suited for Merchant Cash Advances
Typically, this advance is used by businesses that process a high amount of payments through debit and credit cards. If you process a high amount of cash sales or online payments, this might not be the best option for you.
It’s a very popular way to increase cash flow for businesses that experience seasonal trade. Good examples of this are the hospitality or leisure industry. A restaurant or hotel in a ski resort might earn less during the summer months when there are fewer tourists.
They might want to inject some extra funds into their business to keep their cash flow strong during quiet periods. When they experience busier periods, the proportional repayments allow them to pay off more in those months.
Some Leading Merchant Cash Advance Providers
The criteria for qualifying for a merchant cash advance differ from provider to provider. Here is a handy list of different providers and their criteria.
Capify
To qualify with Capify your business needs to:
- Have monthly card sales of at least £6,000.
- Have been trading for at least 6 months.
365 Business Finance
To qualify with 365 Business Finance your business needs to:
- Have a monthly card turnover of a minimum of £5,000.
- Have been trading for at least 6 months.
Merchant Money
To qualify with Merchant Money your business needs to:
- Have been trading for at least 6 months.
- Have a minimum monthly card sales turnover of £5000.
- Not have any other cash advances in place.
Liberis
To qualify with Liberis your business needs to:
- Have an average monthly card taking of £2,500 or more.
- Have been trading for at least 4 months.
- Process card payments through one of the following: Worldpay, Lloyds Cardne, Fiserv, or Elavon.
Nucleus
To qualify with Nucleus your business needs to:
- Have been trading for at least 4 months.
- Provide a minimum of one month of card statements.
- Be based in England or Wales.
YouLend
To qualify with YouLend your business needs to:
- Have been trading for more than 3 months.
- Make more than £1,500 in monthly card sales.
Final Thoughts
Merchant cash advances are a straightforward way to get business finance quickly. There is no complicated paperwork or calculations and the repayments are processed automatically.
It’s a great solution for when your business needs funds urgently and you do not want to go through a complicated application process for a bank loan.
FAQs
What are the alternatives to a merchant cash advance?
If the monthly repayments seem too high for your business, you can always opt for a secured bank loan.
You will need to provide business plans and assets for the application process so you won’t get funds as quickly. However, the repayment period will be longer so you won’t pay as much every month.
Will I need a card machine to get a merchant cash advance?
Yes, since you do not need to provide business assets, this advance is based on revenue only. Your business needs to process card payments to provide a monthly card payment turnover.
The good news is that many of the best card machines have never been cheaper with many costing as little as £16.
How long does it take to receive my funding?
A merchant cash advance is a normally quick and straightforward way to get cash for your business. It can take as little as 48 hours from the time of application to get the funds into your account.
Will a personal guarantee be required to get a merchant cash advance?
No. Just like you do not need any assets as security, you also do not need a personal guarantee. A merchant cash advance is based on revenue only.
What is the difference between a business cash advance and a bank loan?
A business cash advance can be more accessible than a traditional bank loan. There is a higher approval rate (up to 90% with some lenders) and you receive the approval within just a matter of days. It is a more flexible way of borrowing money than through bank loans.
Instead of having to pay back fixed monthly sums, you repay the amount you borrow through a percentage of your card payments. So if your business is making fewer sales one month, you pay back less that month. This eases the financial burden on your cash flow.
Unlike bank loans, you will not have to provide assets as security. This advance is completely based on revenue, meaning the amount you can borrow is based on your business’ monthly card turnover. This means that bad credit or a history of bad credit will not be a barrier.
There are also no late penalties or hidden fees with a business cash advance. You agree beforehand on a factor rate (i.e. the amount you will have to pay back) and a percentage of your card sales that will be taken off for repayment. This will not change for the entire duration of the repayment period.
It is a much quicker way to get funding than bank loans. You receive the money within a matter of days and it also doesn’t take as long to pay back the loan. Generally, business cash advances are paid back in about five to ten months.
So what’s the downside?
Generally speaking the effective interest rate. For example, it’s still possible to get secured business loans with interest rates below 10% per year.
However, a Merchant Cash Advance with a factor rate of 1.2 would mean you effectively pay 20% interest over a shorter time period (5 to 10 months).
Therefore, while a cash advance may be easier and faster, it is almost never cheaper.